Who pays RMD owed on an inherited IRA?
Q: I inherited jointly, with my siblings, an IRA in 2021 from my father. He was old enough to be required to take RMDs each year, but he had not taken out any RMDs in 2021. I am getting mixed advice from different financial institutions. Who is responsible for taking the RMD, and when? Is it the estate of my father or the beneficiaries?
A: According to Ed Slott’s group (www. irahelp.com), the answer is straightforward: The beneficiaries are responsible for taking the RMD that the deceased was required to take in the year of his death. Any of the beneficiaries are allowed to take the RMD. After 2021, the beneficiaries have 10 years to withdraw the proceeds in their share of the IRA. There is no yearly RMD, but all of the proceeds have to be withdrawn by the end of the 10th year.
Q: My wife passed away several years ago. She worked for the IRS and had a 401(k) account. Am I entitled to any benefits associated with that account?
A: For 401(k) accounts, you should be the beneficiary. The only situation in which the surviving spouse is not the beneficiary is when the spouse signs away his right to be the beneficiary. If you did not sign away those rights, you should be the beneficiary. You should contact the agency she worked for and fill out the required forms.
The U.S. Office of Professional Management makes the following recommendation: “Contact the personnel office of the federal agency where the employee worked. You should complete the Application for Death Benefits, Standard Form (SF) 3104, and attach any other forms and/or evidence as the application or circumstances require.”
Q: Recently, you responded to a 57-year-old individual planning for retirement who asked about rolling over his 401(k) to a Roth account. Some employers offer what is known as an “in-house Roth transfer.” You may want to suggest that he determines if this option is available. It has an advantage, even if the individual only converts a small amount initially.
A: You make a good suggestion. To my knowledge, only a minority of employers offer this option, and in many cases there are strict limitations to its use. However, there is, as you pointed out, one significant advantage. Even if an individual only converts a small amount to a Roth IRA, the five-year clock starts at that point; so if an individual decides to convert a larger amount later, the five year clock started when the first IRA conversion was made. If an individual had already established a Roth IRA account, then the five-year clock started when the first contribution was made.
Before any investor considers a Roth conversion, he or she should discuss the issue with a tax adviser. Any amount converted to Roth creates a tax liability, so a large conversion will have a significant impact in the year of conversion. Accordingly, for those considering a Roth conversion, waiting until after retirement, when the marginal tax bracket is lower, should be considered.
Q: After 15 years, I am considering selling my vacation home, making a sizable profit, and buying a new vacation home in Florida. However, I expect that a final closing on my new vacation home will not take place very quickly. What are the time constraints, so I will be able to take advantage of the tax advantages of like-kind exchange tax laws, and not face a large tax liability regarding the sale of my current home.
A: Unfortunately, the tax laws associated with like-kind exchanges do not apply to vacation home sales. Unless you rented out the vacation home — and you haven’t indicated that you did — the tax laws associated with like-kind exchanges don’t apply to your sale. So you will have to report the profit on your sale as a longterm gain. Naturally, you should take into consideration any capital improvements you made to that home when you compute the gain.